ABSTRACT
The rapid growth of the banking business requires banks to adapt quickly and to be supported by reliable risk management. In contrast to the market and credit risks, an operational risk is the first risk type known by the banks, but the least understood compared to market and credit risks. Basel II (International Committee for setting up bank risk management) defines an operational risk as the arising risk from the failure of internal processes, people, systems, or external events. Basel II also sets the standard and internal calculation modelling that must be applied by the banks. This research discusses the method for a bank to measure the operational risk capital cost accurately with the Advanced Measurement Approach (AMA), that requires historical data (Loss Event Database) regarding operational loss events. This advanced approach uses mathematics and probabilistic calculation, that highly likely provides an accurate result. This research found that the Loss Distribution Approach has high accuracy for calculating operational risk on every event of the eight bank business lines. It is known that the largest fraud is derived from internal bank operation.
